Invasion of Ukraine: The international community over Russia
Can Russia sanction-proof its economy?
A comprehensive idea of the sanctions imposed on Russia and consequent countermeasures.
The Russo-Ukrainian conflict undermines all past efforts of international cooperation, interdependence, and peace-seeking accords, proven to be everything but binding in the eyes of Russia. The international community has already stated that sanctions will be imposed on Russia. What are these sanctions? What is their potential impact? What can Russia do to minimize it? This article aims at providing a comprehensive Idea about the current and potential sanctions on Russia as well as the consequent Russian countermeasures to shield its economy. It is worth underlining the obvious yet vital fact that given the advancements on communication, capital mobility and in general, technology; the world economies are more connected than ever before, this has provided leverage for the west in the negotiations table as well as a higher potential impact on Russia’s internal economy. How has this been materialized through the sanctions? We will examine it now.
It is precisely eased capital mobility which allows possession of assets in foreign countries and foreign investments, making a difference between who has the assets and who owns them. This is the reason why financial sanctions can arguably be the most striking ones. Since the very beginning of the invasion many countries have limited interactions with Russian banks and companies, prohibiting payments, disrupting operations, and freezing assets. This (and many factors mentioned later in this article) has led thus far to a huge decrease in demand for the Russian Ruble, as evidenced by its depreciated value which did not amount to one American cent on March 9(0.00658165 USD/RUB). Surely more impactful is the United States’ and Great Britain’s decision to freeze the Russian Central bank’s assets in the west, which according to the BBC are denying access to over 574 million euros worth of dollar reserves, further blocking their ability to make transactions in US dollars and import goods. Another key decision is removing seven major Russian banks from SWIFT, the globally used banking transaction system headquartered in Belgium. This will delay payments towards Russia, disrupt transactions and ultimately account for at least 5% contraction of the economy.
Overall, the financial sanctions will have substantial impact on Russia, isolating it from financial systems, halting its businesses’ transactions and effectively making it a Pariah of the world economy. Russia’s countermeasures for financial sanctions are very limited, with regards to the frozen overseas accounts, there is presumably nothing they can do, although some journalists suggest that prior to acting, some oligarchs might have tried to convert their cash reserves to Bitcoins and other cryptocurrencies to escape the sanctions. Furthermore, upon removal from the SWIFT system there is no replacement alternative, although there are some things that may help reduce the negative impact on Russian economy. The first is the use of SPFS, which is Russia’s own banking transaction system, created in 2014 as a response to US threats to remove Russian banks from SWIFT after the Crimea takeover, this system however is only used in Russia, Switzerland, and some former Soviet countries. The other is the CIPS, China’s own system created in 2015, it is used in over 103 countries, however, it still works closely with SWIFT and using it with the evident purpose of circumventing sanctions might put China in an undesirable situation too.
Passing on to energy-related sanctions, Europe imports 40% of its gas and almost 25% of its oil from Russia, sanctions of this matter have therefore been subject to debate in the EU. Nonetheless, Germany has already halted the certification of the Nord stream 2 pipeline, meaning it cannot operate, which according to CNN, contribute to 55 billion cubic meters of gas annually worth 15 million EUR of missed exports for Gazprom, Russia’s state-owned company. Moreover, EU officials have already stated that feasibility is being assessed for a plan that could cut importing needs from Russia by almost 80% by next year according to Bloomberg. Instead, on March 8th President Biden announced the full ban on Russian oil, gas, and coal while the UK has also banned imports of Russian Oil. Finally, the US, UK and the EU have banned exports of certain products such as chemicals, airplane components, and other possible weapon components including hardware and software.
All these measures greatly decrease Russia’s inflows, deterring their current account balance. As countermeasure Russia has also limited exports of more than 200 products according to the BBC, amongst which Oil and grain, cutting these supplies with the hope that the spiking prices can provide leverage for the negotiations. Furthermore, an underlying increased deficit has significantly raised the risk of defaulting its sovereign debt, according to Fitch Ratings and S&P, which would contribute to a substantial outflow of capital from the country in the short and medium terms.
Lastly, the mass closure and displacement of businesses from Russia. Thousands of firms have stopped activities in the country undefinedly. It may be too early to quantify losses for the increase in unemployment and the decrease in economic activity, but conceptually speaking, incentives to consume may be inexistent and considerably less money would circulate the economy amid desires to increase savings surged by fear. This would lead to further shrinking the economy as evidenced already by the 10% decrease in the Moscow Exchange index (MOEX) and, to the depreciation of the Ruble, reason for which last month the Central Bank raised interest rates to a stunning 20% with the hope of keeping Ruble value stable.
To conclude, sanctions imposed on Russia will have considerable impact on the country. It is evident that globalization, practically inexistent trade barriers, and technology have provided huge leverage for the international community to make an impact on the Russian economy, hopefully gaining an upper-hand in the negotiations’ table and finishing as soon as possible this conflict that has startled our modern society.